First-time homebuyer tax credit: There is no first time home buyer tax credit in 2011.  For those taxpayers who claimed the credit in 2008 you will no longer receive Notice CP03A.  This notice listed the amount of the credit you received and the amount you have to repay as an additional tax.  Effective January 18, 2012, the First Time Homebuyer Look up Tool will be available to all taxpayers who received the first time homebuyer credit in 2008.  This tool will provide you with the account information you need to complete your tax return.  You will add the amount you have to repay to any other tax you owe on your federal tax return.  You must attach completed form 5405, First-Time Homebuyer Credit and Repayment of the Credit to your federal tax return. You will need to access your account information every year to know the correct amount of your repayment.   You will continue to add this information to your federal tax return every year until the credit has been paid in full, you sell your home, or the home no longer is your main home and you report the sale or other disposition on a completed Form 5404 attached to your tax return.

Self-employed health-insurance deduction:  For 2010, self employed workers were able to deduct health insurance premiums against social security taxes on Schedule SE.  Unfortunately, for 2011 that is no longer available.  You can deduct self employed health insurance on the front of form 1040 reducing your taxable income but the IRS has eliminated the deduction for health insurance premiums against your social security taxes.

Adoption credit: For 2011, the tax credit of up to $13,360 for out-of-pocket expenses for the legal adoption of a child is still refundable — meaning that eligible taxpayers can get a check from Uncle Sam even if they owe no tax. If you attempt to adopt a U.S. child, you may be able to claim the credit even if the adoption does not become final.  If you adopt a U.S. child with special needs, you may qualify for the full amount of the adoption credit if you paid few or no adoption related expense, if the adoption is final. A child is a U.S. child if he or she was a citizen or resident of the United States at the time the adoption attempt began.  This credit phases out for joint filers with incomes above $225,210. Adoption papers must be filed with a return. For more information, see the instructions for Form 8839.

Mileage rates: For tax year 2011, the standard mileage rate for business use of a car from January 1, 2011 – June 30, 2011 is 51 cents per mile and for July 1, 2011 – December 31, 2011 is 55.5 cents per mile.  (See IRS Publication 17, chapter 26). For medical or moving expenses the rate from  January 1, 2011 – June 30, 2011  it’s 19.5 cents a mile and July 1, 2011 – December 31, 2011 its 23.5 cents per mile.  (IRS Publication 502).  For charitable donations, the rate remains the same at 14 cents a mile (IRS Publication 526).

Sales-tax deduction: Lawmakers extended (for 2010 and 2011) a deduction for state and local sales taxes in lieu of income taxes. This is primarily used by taxpayers who live in states without an income tax, such as Florida, Texas and Washington.

Charitable IRA rollovers: Lawmakers also extended (for 2010 and 2011) a popular provision allowing taxpayers over age 70½ to make contributions of IRA assets of up to $100,000 per year directly to a charity. The donation isn’t tax-deductible, but doesn’t raise reported income that might trigger higher Social Security taxes or Medicare premiums. Amounts donated can count as part of a person’s required minimum distribution.

Deduction for higher-education expenses: Also extended (for 2010 and 2011) was a deduction for as much as $4,000 of higher-education expenses for singles earning up to $80,000 or couples earning up to $160,000. For many students and their families, however, the American Opportunity Credit is more effective because it’s a dollar-for-dollar tax credit of up to $2,500 per student per year.

Unemployment pay fully taxable: In 2011, all unemployment compensation is taxable for 2011.

We will keep you abreast throughout tax season with all changes as they occur.

           Many married taxpayers choose to file a joint tax return with the IRS because of certain tax benefits this filing status allows.  When a joint tax return is filed both tax taxpayers are jointly and individually responsible to the IRS for the tax and any interest or tax penalties due on the joint return. 

           The following is a list of conditions that must be met in order to qualify for “Innocent Spouse Relief”.

          *  You filed a joint return which has an understatement of tax due to erroneous items.

          *  You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an             understatement of tax.

           *  Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.

           *  A request for innocent spouse relief will not be granted if the IRS proves that you and your spouse transferred property to one another as part of a fraudulent scheme.  A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

          Once form 8857 has been received by the IRS the process may take up to 6 months before a determination is made.  During the process time, the Service is requesting your tax information and contacting the non-requesting spouse.  The law, the IRS must contact your spouse or former spouse.  There are no exceptions, even for victims of spousal abuse or domestic violence.

          To see more information on “Innocent Spouse Relief” you can visit the following IRS publications about Innocent Spouse relief:

          IRS  Publication 971, Innocent Spouse Relief. For further information on the appeals process refer to Tax Topic 151, Your  Appeal Rights.   Also see IRS Publication 1, Your Rights as a Taxpayer, IRS Publication 5, Appeal Rights, IRS Publication 556, Examination of Returns, Appeal Rights.., and IRS  Publication 17, Your Federal Income Tax.

A few exceptions to the 10% penalty for IRA Withdrawals are:

• Made out to a beneficiary or estate on account of the IRA owners death
• Made on account of disability
• A qualified distribution – distributions made after age 59 1/2
• IRS levy
• Not in excess of certain medical insurance premiums paid while unemployed
• Not in excess of your qualified higher education expenses

Are there exceptions to penalties on a 401K distribution:

• This plan allows penalty free distributions beginning at age 55 if you terminate  employment no earlier than the year in which you turn age 55.   If you retire at age 54 and take a withdrawal, the age 55 provision will NOT APPLY.   Your withdrawal will be subject to the 10% early withdrawal penalty.
  • Penalty free withdrawals may begin at age 59 ½.
  • There are few conditions that must be met before you can apply for a 401K distribution.   For more information visit the link below on retirement distributions.   

We also recommend having tax withholding withheld from your distribution.  This eliminates any surprises when your taxes are completed.  Depending on the amount of distribution the taxes due could be a larger amount than expected.  Let’s be honest, no one likes those kinds of surprises.   In the event that it is necessary to take a large distribution, this could also move you in to what we call the “Marginal tax rate”.  This is different from the average tax rate which is the total tax paid as a percentage of total income earned.  The marginal tax rate is the rate on the last dollar of income earned.   Once you reach the threshold the IRS has allowed for the average tax rate anything above that amount will be taxed at a higher rate.  You need to look at this and consider all avenues before your distribution. For the most part 20% taxes are withheld from your distribution.  We recommend using our calculator to determine the proper amount to be withheld.  This will help give you peace of mind when completing your necessary distribution.   Remember all distributions count as income, and therefore the early distribution penalty would be in addition to the regular income tax.

 http://www.cpasitesolutions.com/content/calcs/Tax1040.html

 You should receive a 1099-R at the end of the year which indicates your distribution to be an early distribution or a normal distribution.   This form also indicates the amount of tax withholding if any you had withheld from your distribution.  Remember to keep this and all other tax forms together for your tax preparer.  

http://taxes.about.com/od/retirementtaxes/a/early_penalty.htm

• Cutting the social security payroll tax in half to 3.1% for employers on their first $5 million in wages
• A full holiday on the social security payroll tax firms pay for any growth in their payroll, due to new hires, increased wages, or both (up to $50 million)
• Tax credits of up to $5,600 for hiring unemployed veterans and up to $9,600 for hiring unemployed workers with service-connected disabilities
• Investing $30 billion to prevent layoffs of up to 280,000 teachers, and $5 billion to support the hiring and retention of police officers and firefighters
• An extension of unemployment insurance, in addition to a tax credit of up to $4,000 for hiring workers who have been looking for a job for over six months
• Extending the employee social security tax rate reduction from 6.2% to 4.2% (passed December 2010) which is due to expire at the end of the year, and expanding on it by further reducing the rate to 3.1%

The passing of this bill would offer great opportunities to a great number of Americans. The bill would lower the taxes small businesses have to pay, and give them an incentive to hire more workers, allowing the business to grow, and also providing the unemployed a chance to find work. It would also ease the tax burden on the lower and middle class through the payroll tax cut; but on the other hand, President Obama’s proposal calls for lessened tax cuts for the wealthiest Americans. For most Americans, the passing of this bill would affect them in one way or another. So would you like to see the bill passed, or do you want it to be rejected?

Read more at: Fact Sheet: The American Jobs Act

Submarined in the new health-reform law is this big onerous penalty, called a “shared responsibility payment,” that the government can slap against businesses with more than 50 workers if they don’t provide “affordable” health benefits to their full-time employees, which the government gets to define.

The health-reform law exempts all small businesses with fewer than 50 employees from the law’s “shared responsibility requirement,” which begins in 2014.

Sales and Use Tax

Aug 25 Posted by Lisa in Taxes

You remember that time you were a kid and you wanted that special toy you saw in the window of the toy store? You saved up the exact amount of money on the price tag, but when you eagerly marched over to the cashier, he asked for more money than the toy was actually worth! That, my friends, is the sales tax.

Sales tax is added on to the total price of many purchases around the United States. Although a total of 45 states have sales tax, there are no two states that have the exact same rules when it comes to sales tax. The only similarities between all 45 states are taxing only at the retail level and all the rules about the tax are determined by the state, not the federal government. Sales tax can affect a number of sales, which may or may not include retail sales, leasing, rentals, and even some services. There are special cases, though, where items are sold at retail level more than once, like used cars or refurbished items, and can be taxed again.

Exemption of Sales Tax

Sales tax exemptions are few and far between. One instance where the tax doesn’t take effect is when the purchase of an item is meant for resale. In other words, if you buy an item and plan on selling it again, the tax is left out. One of the other few tax avoidance methods is to present the seller with an “Exemption Certificate” that has been approved by the state, allowing the buyer to avoid the sales tax.

Organizations making purchases that they will use to power their business are exempt from sales tax if they are strictly charitable, religious, or special in their own little way, as defined by law.

Use Tax

Another tax that is used by states with sales tax is the “Use Tax.” If you didn’t pay sales tax at the time of the purchase, the use tax is brought upon the buyer to remit the sales tax to your state. So, yes, going to Delaware to purchase that flat-screen TV and avoid the sales tax won’t work!

Below is a listing of some of the most traveled states during the summer months.  Take a look at their tax rate and the taxable items, and save yourself a few bucks by sticking to low tax rate states!

California – 7.25%

• Sales tax is collected on all purchases of tangible personal property.
• Unprepared food, crops and seeds, and fertilizer used to grow food are among some items that are exempt from sales tax.

Delaware – No Sales tax

• The state does impose a tax on the gross receipts of most businesses. Business and occupational license tax rates range from 0.096% to 1.92%, depending upon the category of business activity.
• There is also a 3.75% ‘document’ fee on vehicle registrations.

Florida – 6%

• The tax is imposed on the sale or rental of goods; the sale of admissions; the lease, license, or rental of real estate property; the lease or rental of transient living accommodations; and the sale of a limited number of services such as commercial pest control, commercial cleaning, and certain protection services.
• Unprepared foods and prescriptions are exempt.

Hawaii – No Sales Tax

• Hawaii does have a different tax, however, called the General Excise Tax which applies to nearly every conceivable type of transaction (including services), and is technically charged to the business rather than the consumer. Hawaii law allows the business to pass on the tax to the consumer in a similar fashion to a sales tax.
• Unlike other states, rent, medical services and perishable foods are subject to the excise tax. Also, unlike other states, businesses may or may not show the tax separately on the receipt, as it is technically part of the selling price. 4.0% is charged at retail with an additional 0.5% surcharge.

Maine – 5%

• Prepared foods are taxed at a rate of 7%.
• Unprepared foods are exempt.
• Prescriptions are exempt but over the counter medicines are taxable.
• Clothing and footwear are taxable.

 Maryland – 6%

• Prescriptions are exempt.
• Unprepared foods are exempt.
• Candy, soda and prepared foods are taxed at the sales tax rate of 6%.
• Clothing is taxable in Maryland.
• Alcohol is taxed at 9%.  This was raised from 6% to 9% on July 1, 2011.

New Jersey – 7%

• Unprepared foods are exempt.
• Sweet foods and pet foods are taxable.
• Medicine and clothing are exempt. Sales of clothing and accessories that are made of fur from the hide or pelt of an animal and are valued at $500 or more are subject to a 6% Fur Clothing Gross Receipts Tax.

Pennsylvania – 6%

• Clothing and footwear are exempt.
• Unprepared foods are exempt.
• Prepared foods and soft drinks are taxed at the rate of 6%.

If you are looking to vacation, keep the above states in mind along with their sales tax and taxable items. Sometimes the vacation of your dream can turn into the exhaustion of your wallet if you’re not careful about the sales tax in that area. Just remember, you are responsible for paying the use tax if you purchase something in a state with no sales tax!

#1. Wyoming

State Income Tax: 0%; State Sales Tax: 4%

Since there is no income tax, that means that all retirement income is tax exempt! In addition to that and the low sales tax, prescription drugs and groceries are also exempt from sales tax, and property taxes are low, with only 9.5% of the market value being subject to tax.

#2. Mississippi

State Income Tax: 3-5%; State Sales Tax: 7%

All retirement income is exempt from state income taxes in Mississippi as well. Remaining income is taxed at a maximum of 5%, and prescription drugs and health care services are exempt from taxes. Property taxes are also low, with 10% of the market value being subject to tax, and in addition, seniors qualify for an exemption of the first $75,000 of value.

#3. Pennslyvania

State Income Tax: Flat rate of 3.07%; State Sales Tax: 6%

The home state of Maco & Associates and many of our clients is also a great place to retire! Pennsylvania excludes retirement income from state income taxes as well, and remaining income is taxed at a low 3.07%. Food, clothing, and medicine are exempt from sales taxes, but property tax rates do vary and can be greater, especially near larger cities. Older Pennslyvanians who rent or own homes may also qualify for a property tax or rent rebate.

#4. Kentucky

State Income Tax: 2-6%; State Sales Tax: 6%

Kentucky allows residents to exclude up to $41,110 per individual in retirement income from state income taxes. That means that, per person, the first $41,110 of retirement income earned is not taxed, and anything beyond that is paid at the state income tax rate of 2-6%. Homehowners 65 and over qualify for a homestead provision that exempts part of the value of their property from state taxes.

#5. Alabama

State Income Tax: 2%-5%; State Sales Tax: 4%

Military, public, and private defined-benefit pensions are excluded from state taxes in Alabama, and the remaining income is taxed at 2-5%. Food is taxed here, but prescription drugs are not. Alabama also has some of the lowest property taxes in the country, and homehowners 65 or over are exempt from state property taxes, though cities may still assess their own property taxes. The downside is that despite the state sales tax being 4%, counties can add an addition sales tax upon that, in some cases bringing the total sales tax paid to 10% in certain areas.

These states in particular are great destinations if you want to minimize your taxes paid once you retire, but they’re not the only smart options. You also may have something very different in mind for where you want to retire. The best bet is to research how much your destination of choice will cost you and see if it’s the right fit for you or if you can do better!

Source: Yahoo! Finance

Here’s a little relief for business owners. The IRS has increased the standard mileage allowance for business usage by 4.5 cents to 55.5 cents for July through December of this year. The increase comes because of the high cost of gas earlier this year, even though the price of gas has come down recently.

The standard mileage allowance for medical and moving usage also increased by 4.5 cents to 23.5 cents per mile.

The rate for charitable mileage stays at 14 cents per mile.

This rate is good for 2011 only – the rate for 2012 will be announced in the fall.

Who’s affected? The biggest group includes all taxpayers who itemize deductions on Schedule A instead of taking the standard deduction, which for 2010 is $11,400 for married couples and $5,700 for single filers. Itemizers give the IRS a detailed list of their deductions for such items as mortgage interest, charitable donations, and state and local taxes, in order to qualify for greater tax benefits from these write-offs.

Others affected by the delay include teachers who claim the $250 Educator Expense Deduction and those taking the Higher Education Tuition and Fees Deduction on Form 8917. But taxpayers using other education benefits — such as the American Opportunity Tax Credit — aren’t affected.

Recently, the IRS announced plans to start accepting delayed returns on or about Feb. 14, according to agency spokesman Eric Smith. Until then, electronic filers in the affected groups may find that the agency’s computers won’t accept their returns.

This year is also notable because it’s the first year that the IRS isn’t sending paper tax forms and instructions to millions of taxpayers. Instead, it’s pushing both preparers and individuals to e-file their returns online, although people who want or need to file on paper may print forms from the IRS’s website (www.irs.gov) or pick them up at a local office. Last year, 70% of individual returns — nearly 100 million — were e-filed.

Finally, taxpayers get a break this year. This year’s tax due date is Monday, April 18, even though April 15 falls on a Friday. The reason: The IRS follows the District of Columbia’s holiday calendar, and April 16 is a D.C. holiday that moves up when it falls on a Saturday. It commemorates Abraham Lincoln’s signing of an 1862 order emancipating slaves in the district. For taxpayers who use the automatic six-month extension — a grace period for filing but not for paying — the due date is Monday, Oct. 17.

Here are more changes affecting 2010 returns.

First-time homebuyer tax credit: There have been several versions of this credit, but most taxpayers who claimed it for 2008 purchases must begin repaying it on their 2010 return. See parts III and IV of Form 5405.

Self-employed health-insurance deduction: For 2010 only, self-employed workers who can deduct health-insurance premiums also may take them against Social Security taxes on Schedule SE. For 2010 and after, self-employed workers who deduct insurance premiums can include those for a child who is under age 27 at the end of year, even if the child is not a dependent for tax purposes.

Adoption credit: For 2010, the tax credit of up to $13,170 for out-of-pocket expenses for the legal adoption of a child is refundable — meaning that eligible taxpayers can get a check from Uncle Sam even if they owe no tax. This credit phases out for joint filers with incomes above $182,520. Adoption papers must be filed with a return. For more information, see the instructions for Form 8839.

Mileage rates: For tax year 2010, the standard mileage rate for business use of a car is 50 cents per mile (See IRS Publication 17, chapter 26). For medical expenses, it’s 16.5 cents a mile (IRS Publication 502). For moving expenses, it’s 16.5 cents a mile (IRS Publication 521). For charitable donations, it’s 14 cents a mile (IRS Publication 526).

Sales-tax deduction: Lawmakers extended (for 2010 and 2011) a deduction for state and local sales taxes in lieu of income taxes. This is primarily used by taxpayers who live in states without an income tax, such as Florida, Texas and Washington.

Charitable IRA rollovers: Lawmakers also extended (for 2010 and 2011) a popular provision allowing taxpayers over age 70½ to make contributions of IRA assets of up to $100,000 per year directly to a charity. The donation isn’t tax-deductible, but doesn’t raise reported income that might trigger higher Social Security taxes or Medicare premiums. Amounts donated can count as part of a person’s required minimum distribution.

Deduction for higher-education expenses: Also extended (for 2010 and 2011) was a deduction for as much as $4,000 of higher-education expenses for singles earning up to $80,000 or couples earning up to $160,000. For many students and their families, however, the American Opportunity Credit is more effective because it’s a dollar-for-dollar tax credit of up to $2,500 per student per year.

Unemployment pay fully taxable: In 2009, taxpayers were allowed to exclude up to $2,400 of unemployment compensation from income. That exemption expired, so all unemployment compensation is taxable for 2010.

No extra standard deduction for property taxes: Lawmakers didn’t extend a provision allowing taxpayers to add as much as $1,000 to their standard deduction if they pay property taxes. This means taxpayers who want to deduct property taxes will have to itemize.

Sourc:

The Wall Street Journal